Free-fall over, but key drivers to job recovery still missing

Aug. 26, 2009

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Gary McKillips
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Dr. Rajeev Dhawan, Director
Economic Forecasting Center
Robinson College of Business
Mobile: 404-867-2286

ATLANTA - The economy's free fall has come to an end but the forces that have traditionally firmed-up job recovery are still missing, said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University's Robinson College of Business.

In his Forecast for the Nation, released today, Dhawan said that while the consensus among most Wall Street forecasters is that the recession has ended, two of the major drivers of current and future economic growth are still absent. According to Dhawan, "tech investment growth, a critical predictor of job growth, is still non-existent and new construction activity is running at a shadow of its former self.

"The fallout (from the recession) is far from over when viewed through the prism of job loss rates and income growth," said Dhawan, who noted that "investment by the corporate sector, especially in the arena of high-tech equipment and software, has fallen at an annual rate of 10 percent in the past 18 months and the required corporate revenue growth to jump-start activity is still missing." He also said that tech investment numbers must "climb into substantial positive territory to enable any job additions in the next 12 months."

A further impediment to future job growth, said Dhawan, is the "reluctance of CEOs to convince their boards to undertake risky ventures while revenue growth is negative."

Although he remains cautious, the Georgia State forecaster said that "credit markets are beginning to thaw and that is a good sign." Dhawan also listed the lessening of unemployment insurance claims, increases in consumer confidence and the bottoming out of exports as other positive markers.

Ultimately, Dhawan foresees subpar real GDP growth throughout 2010 with a "grudging return to 2.0 percent growth in 2011."

Highlights from the Economic Forecasting Center's National Report

• Overall, real GDP growth will be positive (0.4%) in the third quarter of 2009, but will turn negative one more time (0.6%) in the fourth quarter before completely climbing out of recession. The ensuing recovery will, however, be long and shallow with lackluster business investment thereby keeping real GDP growth below the 3.0% trend line for the foreseeable future.
• Consumption growth is expected to be positive in the third quarter but negative in the fourth before turning decisively positive in 2010. Thus, consumption will decline by 1.0% in 2009 but recover mildly by 0.5% in 2010. It will increase by 1.7% in 2011.
• After growing only 1.6% in 2008, business fixed investment will decline by 18.5% in 2009, and again by 3.9% in 2010, before making a positive 3.9% comeback in 2011.
• Since the beginning of the recession in December 2007 the economy has lost more than 6 million jobs. The job loss rate will moderate going forward in the second half of 2009 but still will result in an average of 340,000 job losses per month for the year 2009. In 2010 monthly job gains will be limited to only 10,000 jobs. In 2011 the economy will add jobs at the rate of 100,000 jobs per month. The unemployment will continue to hover in the 10.5% range even in 2011.
• The Fed will gradually begin raising rates in summer 2010. On an annual basis the 10-year bond rate will rise from its 3.3% average in 2009 to 3.9% in 2010, and then climb to 4.3% in 2011.

Georgia and Atlanta - No New Construction Signals No Real Recovery Until 2011

Still reeling from the effects of a construction boom gone bust, Georgia will have to wait until 2011 before real recovery in the form of job growth gains a foothold.

According to Georgia State Economic Forecasting Center Director Rajeev Dhawan in his Forecast of Georgia and Atlanta, "Job losses in Georgia during this severe recession have totaled over 250,000, or almost 6.1 percent of the employment base - a more severe drop than that experienced nationally." Dhawan says the severity of the recession is linked not only to corporate job losses from last fall's financial crisis but also from the severe drop in residential building activity that has happened in the last 18 months.

"Going forward," said Dhawan, "the Atlanta metro area will lack construction opportunities of sufficient number and size as the state's banking industry takes its time to recover." He noted that Georgia experienced 16 bank failures (almost 25 percent of the total national closings) and that more are expected. This dries up the source for construction financing especially residential. In addition, with the current freeze in the commercial mortgage-backed securities market, many previously announced commercial projects in the Atlanta area, the hub of the state's construction activity, have been scrapped due to lack of funding. All that remains are some small projects and public works but, according to Dhawan, "the area will need multitudes of those to make up for one $200 million condo/office project." He also noted that "indigenous growth from corporations headquartered here will be key to overall growth in the future."

Georgia also continues to suffer from curtailed government spending at the state and local levels as a result of severely reduced tax revenues, especially sales tax proceeds that are still dropping due to the consumer pull back in spending on big-ticket items, and from reduced tourism and convention business.

With the negative effects of reduced construction activity and state and local spending, Dhawan predicts that the unemployment rate will rise from the current 10.1 percent level to 11.0 percent by mid-2010. He says "the recovery will begin in 2011 when repair work by the Treasury finally pays dividends by improving credit flow to small and medium enterprises. Also the federal fiscal spending multiplier will kick in by then."

However, warns Dhawan, even in 2011, the recovery will remain "tepid."

Highlights from the Economic Forecasting Center's Local Report

• Job losses will total 205,000 for calendar year 2009 (4.9% annual job loss rate). In calendar year 2010, 43,800 jobs will be lost (a 2.5% annual rate of loss). In 2011 the economy will add 60,000 jobs (0.6% annual growth rate). The professional and business services sector will lose jobs at the rate of 8.7% in 2009, drop by 4.0% in 2010, but recover with a 2.3% growth in 2011. Nominal personal income gains were 3.1% in 2008, but will decline by 1.0% in 2009. In 2010 and 2011 income gains will be anemic 0.4% and 2.8%, respectively.
• Atlanta will lose 56,900 more jobs in the second half of 2009, making for 130,000 net losses (a 5.5% annual job loss rate) for calendar year 2009. In 2010 expect 22,300 jobs losses or a 2.7% annual job loss rate. In 2011 the economy will add 44,800 jobs. However, residential housing permit issuance remains less than 7,000 even in 2011.